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Friday
Jul222011

What's the Default?

There’s a lot of talk about the US debt ceiling and whether that will be raised or not by the August 2 deadline.  The odd thing about this is that it’s always framed in terms of an impending default, when it’s not clear that will happen at all.  Especially when that’s expressly prohibited by the US Constitution (Amendment 14, Section 4):

The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned. But neither the United States nor any State shall assume or pay any debt or obligation incurred in aid of insurrection or rebellion against the United States, or any claim for the loss or emancipation of any slave; but all such debts, obligations and claims shall be held illegal and void.

Clearly, the amendment addresses debt in the context of the Civil War in particular, but it’s not unreasonable to read that as a blanket prohibition on a default on treasury bonds.  So on August 2, absent legislation, we’ll be in the following state:

  1. Congress has said “no more borrowing”.
  2. Congress has determined how money can be printed, and the answer is “not without more borrowing” (money is printed by the Fed and exchanged for new Treasury Bonds).
  3. Congress has specified the amount of taxes to be taken in.
  4. Congress has specified how much is to be spent and on what.  (But it’s a higher amount than the revenues provided for in 2!)
  5. Treasury Bonds specify when they need to be repaid and for how much, and the Constitution says Congress can’t just decide to not pay those.  (There are also a few other obligations the Constitution says Congress can’t decide not to pay, including judicial salaries.)

That’s an odd state, as of yet untested under US law.  Clearly, something’s got to give.  The executive department must faithfully meet conditions 1-5, which is impossible.  The Constitution gives only Congress the authority to alter 1-4, and no one the authority to alter 5.

Since the debt ceiling law and the most recent budget are in some sense contradictory, and Congress is the one with the power to alter those conditions, I think the relevant question is how to interpret the actions of Congress regarding those laws.  I can think of a two reasonable possibilities:

One: The budget implicitly raises the debt ceiling to cover the difference between revenues and expenses, since otherwise that law would be requiring the impossible.  (Bill Clinton seems to take almost this view, but it’s a way better argument to suggest that Congress implicitly loosened 4 than to say the Constitution gives the president the authority to violate 1 in order to fulfill 5.  Both are required by the Constitution, it would be quite an ass-pull to say that Am. 14 Sec. 4 gives additional emergency borrowing powers to the Executive Branch.)

Two: The debt ceiling law, unless explicitly repealed, implicitly limits spending after the debt ceiling is reached to revenues taken in.  The budget didn’t amend that restriction, so the restriction still applies.  Unfortunately, the debt ceiling law doesn’t specify what spending to cut or how that should be decided.  But a reasonable assumption might be that the Executive Branch (the Secretary of the Treasury?) would have the authority.

That puts the power in the right constitutional place:  When Congress passed the last budget, they either intended increased borrowing or decreased spending, they can’t have both.  That’s what should happen.  Of course, it’s not ideal for courts to try to interpret laws that are either overly vague or logically impossible, but it’s not the courts’ fault that Congress failed to do at least one of those in this case.

Some have suggested that the debt ceiling law is unconstitutional because they view all spending as sacrosanct under Am. 14 Sec. 4.  There’s a good take-down of that argument by Professor Lawrence Tribe, here.  His counter-argument is sort of like my second case above, except he doesn’t claim that “bend 4 to satisfy 1-3” is implicit in the budget, he just cites legal precedent.  (I like my argument a bit better, but Tribe’s argument certainly beats Clinton’s, and I’m willing to defer to his expertise.)  I also agree with the caveat on his conclusion:

I do not mean to suggest that, if it becomes necessary for the President to prioritize expenditures, the President is free to use whatever priorities he likes. First, the Constitution itself requires giving some expenditures (such as the payment of judicial salaries, Art. III, § 1, or payments on the public debt, Amdt. XIV, § 4) priority over others. Second, even if circumstances make it impossible for the President to obey the anti-line item veto rule announced in Clinton v. New York, he must do his best to honor the principles animating that rule: namely, using the line item veto to give the President unbounded power over spending would allow the Chief Executive to reward political allies and punish political adversaries. The President may not, for example, prioritize spending in blue states over spending in red states. Within those constitutional boundaries, however, it is up to the President to determine how spending must be prioritized when it becomes impossible to comply with all of the President’s legal obligations simultaneously.

I don’t know if that’s a reasonable prediction of what would actually happen if the debt ceiling failed to be raised.  Obama would have the first move, so if he did something other than prioritize spending, the courts would have to react to that instead.

And it’s not clear that such a “default” (not actually a default!) will happen.  There are still possible ways to avoid that, including congress actually raising the debt ceiling, or harebrained schemes in which Congress restores the “out of power party futilely opposes the debt limit raise” status quo by handing over the raise-the-debt-limit power to the Executive, reserving for Congress enough power to oppose Obama’s decision but not enough to actually succeed.

(Also, if all this media default hullabaloo has you thinking about fleeing to gold or some such, you should find this Moldbug piece interesting.)

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